EREC Exam #2

Question 1

Stage 1 of Production

Answer 1

• when the producer will not produce any output levels below “A”
• When MPP is above APP

Question 2

Stage 2 of Production

Answer 2

• “Economically rational stage of production”
• the rational, profit-maximizing producer will always operate in stage 2 of production
• the exact output level in this stage will be determined by the price of inputs and the selling price of outputs
• When APP finally hits MPP and APP is above MPP

Question 3

Stage 3 of Production

Answer 3

• even though costs might not increase, total revenue would decrease
• profit cost would decrease
• APP is far above MPP

Question 4

Production Function Shifters

Answer 4

Change in technology
Supply shocks
Change in quantity of inputs

Question 5

Marginal Physical Product

Answer 5

The amount added to the total physical product when another unit of the variable is used in production

Question 6

Marginal cost

Answer 6

the increment to the total cost that comes from producing one more unit of output

Question 7

Fixed cost v. Variable cost

Answer 7

Fixed cost: occurs even when no output is produced
Variable cost: depends on the level of output to see what is produced

Question 8

Accounting profit v. Economic profit

Answer 8

Accounting profit: the profit shown on paper, purely “revenue-total costs”
Economic profit: accounts for opportunity costs

Question 9

Profit is equal to

Answer 9

PROFIT = TR – TC =TR - TVC – TFC

Question 10

How do you maximize profit?

Answer 10

operate where marginal revenue = marginal cost

Question 11

P > AVC

Answer 11

The firm recovers all of its varible cost and some of its fixed costs so it operates where P=MC

Question 12

P < ATC

Answer 12

the firm loses all of its fixed costs and some variable costs (its better to shutdown and just lose the fixed costs)

Question 13

Where is the shutdown point?

Answer 13

When P=ATC=MC

Question 14

Where is the breakeven point?

Answer 14

When P=AVC=MC

Question 15

Below the shutdown point:

Answer 15

you produce nothing

Question 16

Above the shutdown point

Answer 16

you produce along the short run MC curve to recover all its variable costs and at least some of its fixed costs

Question 17

Own price elasticity of demand:

Answer 17

percentage increase in quantity demanded that occurs as a result of a 1 percent reduction in price, ceteris paribus(other things being equal)

Question 18

General own price elasticity formula

Answer 18

(Q1 - Q’1)/(.5(Q1+Q’1))
/ (P1 - P’1)/(.5(P1+P’1))
= prime
Always q over p

Example:
P Q-D
— ——
2 12
3 8

Always start with the formula
Sigma D = % change Q / % change P
= (12-8 / .5 (12 + 8 )) / (( 2 - 3)/(.5 (2+3)
= (+4/10) / (-1/ 2.5)
= +.4/-.4
= - 1

Question 19

Own price elasticities (ED is…)

Answer 19

ED > 1, elasticity; increasing-price decreases total revenue

ED < 1, inelastic; increasing price increases total revenue

ED = 1, unit(ary) elastic; increasing the price (a little) leaves total revenue unchanged

Question 20

Elasticity:

Answer 20

always “of” quantity “with respect to” price

Question 21

Cross Price-Elasticity (of demand)

Answer 21

Percentage change in quantity purchased of ONE GOOD that occurs as a result of a 1 percent change in the price of ANOTHER GOOD

Question 22

Cross Price-Elasticities (Exy is..)

Answer 22

Exy, > 0 substityes (+/+ or -/-)
Exy, < 0 Complements (+/- or -/+)
Exy, = 0 Unrelated/independent goods (0+ or 0-)

 X1 = good, M = Income

Question 23

Substitutes:

Answer 23

products that are usually considered a replacement for each other. Products that are related such that an increase in the price of one will cause an increase in DEMAND for the other

Question 24

Complements:

Answer 24

products that are usually consumed jointly. An increase in the price of one will cause DEMAND for the other to fall

Question 25

Independent:

Answer 25

the price of one good DOES NOT affect the quantity demanded of another good

Question 26

Income elasticity (of demand):

Answer 26

Percentage change in quantity purchased of ONE GOOD that occurs as a result of a 1 percent change in INCOME

Question 27

Income Elasticity of Demand Equation

Answer 27

(D1-D0)/(D1+D0) /(I1-I0)/(I1+I0)

Question 28

Interpreting Income elasticities

Answer 28

N > 0, Normal N < 0, Inferior N < 1, Luxury 0 < N < 1, Necessity

Question 29

Normal goods:

Answer 29

IF consumption of a good goes up as income goes up. This is what we normally expect, that when people make more money, they will feel richer and buy more of most goods.

Question 30

Normal goods:

Answer 30

IF consumption of a good goes up as income goes up. This is what we normally expect, that when people make more money, they will feel richer and buy more of most goods.

Question 31

Inferior goods:

Answer 31

IF consumption of a good goes down as income goes up. This is the opposite of what we normally expect. Perhaps making more money changes the quality of goods that people buy?

Question 32

Luxury goods:

Answer 32

a good for which demand increases more than what is proportional as income rises so that expenditures on the good become a greater proportion of overall spending. These goods are typically not essential, and only people with more disposable income can afford to buy them. People with higher income will spend more on these to show their affluence

Question 33

Necessity goods:

Answer 33

product(s) and services that consumers will buy regardless of the changes in their income levels. The quantity consumed of necessity goods doesn’t change much when income changes

Question 34

price taker

Answer 34

an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own